Shares of global network equipment giant Nokia (NYSE:NOK) initially plunged as the novel coronavirus pandemic emerged and shutdown the globally economy, with NOK stock falling from $4.30 in mid-February, to $2.30 by mid-March.
NOK stock has since completed a full round trip. Today, shares trade exactly where they traded before Covid-19 emerged, up back around $4.30.
Why the huge rebound in Nokia stock? Because of building 5G momentum.
Since March, Nokia has announced various, multi-vertical 5G partnerships with Marvell (NASDAQ:MRVL), Intel (NASDAQ:INTC), China Mobile (NYSE:CHL), Chunghwa Telecom (NYSE:CHT), Vodafone (NASDAQ:VOD), Telus (NYSE:TU) and Taiwan Star Telecom.
Nokia also won 5G-related contracts with Rakuten Mobile, Tencent (OTCMTKS:TCEHY) and Baidu (NASDAQ:BIDU). Plus, the company reported strong first-quarter numbers in April which underscored healthy 5G deal momentum and rapidly improving profitability.
It makes complete sense that NOK stock has fully recovered its Covid-19 losses.
It also makes complete sense for 5G momentum to carry this stock above $5 over the next few months.
Here’s why.
Building 5G Momentum
The bull thesis on Nokia stock is one built entirely on the 5G growth narrative.
That’s a good growth narrative to hang a hat on.
The mass deployment and mainstream adoption of 5G technology over the next few quarters and years will fundamentally change everything about our society. By enabling ten-fold increases in internet connectivity speed with significant reductions in latency and equally significant increases in network capacity, 5G won’t just make surfing the internet on your smartphone way better. It will also enable a new era of internet-based communications, paving the way for things like ubiquitous smart devices and self-driving to become a reality.
All of that happens because Nokia provides the networking infrastructure for it to happen.
In other words, without Nokia, the trillion-dollar 5G revolution that is set to forever change the world over the next few years, would never even begin.
To that end, Nokia’s growth narrative will materially improve with increased adoption of and investment in 5G technology over the next few years. Revenue growth rates will improve on the back of increased 5G demand. Gross margins will improve thanks to higher average selling prices and lower product costs. Operating expense rates will drop thanks to stronger revenue growth and positive operating leverage. Profit growth rates will charge higher.
All in all, building 5G momentum over the next few years will supercharge the overall Nokia growth narrative.
Nokia Stock Above $5?
My numbers suggest that NOK stock has upside potential to levels substantially above $5 over the next few months.
Here’s the math.
Nokia should able to leverage rising 5G demand tailwinds to sustain 3% to 5% revenue growth per year into 2025. On the back of strong demand, average selling prices of equipment should rise, and push gross margins higher towards 40%. Opex rates should moderate as management focuses on cost reductions. Operating margins should rise towards 13% to 14%.
Assuming so, Nokia appears well positioned to report around 50 cents in earnings per share by fiscal 2025.
The market’s forward earnings multiple over the past five years has averaged around 17. Throw that multiple on 50 cents in fiscal 2025 earnings per share. You arrive a fiscal 2024 price target for NOK stock of $8.50.
Discount that back by 10% per year. That implies a fair 2020 price target for NOK stock of nearly $6.
As such, I don’t think this recovery rally in NOK stock is over. Instead, building 5G momentum will push shares above $5 and closer to $6 over the next few months.
Bottom Line on NOK Stock
NOK stock has completed a full round-trip back to its position before Covid-19. While this may seem like a natural time to take profits, I don’t think the stock is maxed out here.
Instead, I see the company’s 5G momentum only building over the next few months. As that happens, the fundamentals say NOK stock could rally another 35% or more.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
